How Obama's Budget Impacts Retirement Savers

President Obama's 2014 budget proposal includes provisions that will significantly change Social Security, Medicare and retirement accounts. Here's a look at the retirement changes Obama is suggesting:

Chained CPI. Social Security benefits are adjusted for inflation each year as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Obama's budget proposes changing the measure of inflation to the chained CPI beginning in 2015. "Unlike the standard CPI, the chained CPI fully accounts for a consumer's ability to substitute between goods in response to changes in relative prices and also adjusts for small sample bias," according to the budget. Using the chained CPI would decrease the annual Social Security cost-of-living adjustment by an average of about 0.3 percentage points. A retiree receiving a $1,000 monthly benefit would see a $27 increase instead of the $30 boost retirees would get using the current measure. Just under a third (30 percent) of Americans are in favor of reducing the cost-of-living adjustment, according to a recent National Academy of Social Insurance and Mathew Greenwald and Associates online survey of 2,000 Americans ages 21 and older. The switch to the chained CPI it expected to reduce the deficit by at least $230 billion over the next 10 years, according to the White House.

New retirement account limits. Obama's budget seeks to prohibit investors from accumulating over $3 million in tax-preferred retirement accounts. "Individual retirement accounts and other tax-preferred savings vehicles are intended to help middle class families save for retirement," according to the budget. "But under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving." The budget proposal would limit an individual's total retirement account balance including 401(k)s, IRAs, and similar types of tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013. An Employee Benefit Research Institute analysis found that approximately 0.06 percent of account owners had more than $3 million in assets in their retirement accounts at the end of 2011. Among people age 60 and older, about 0.11 percent of retirement account participants surpass the threshold. "Time, which allows savings to accumulate in these accounts, tends to increase the probability that younger workers will reach the inflation-adjusted limits by the time they reach age 65," according to the EBRI report. The White House projects that this proposal would raise $9 billion over 10 years.

Automatic IRAs. The budget would automatically enroll employees without a retirement plan at work in IRAs. The contributions would be withheld from paychecks and directly deposited in a retirement account unless workers opt out. A federal government match would also be provided for low income savers via the saver's tax credit. Small employers would be eligible for tax credits for the administrative costs of setting up the plans. The budget also doubles the tax credit for small employers that start new retirement plans for workers.

Close the Medicare Part D donut hole sooner. The Affordable Care Act gradually closes the Medicare Part D coverage gap by 2020 by providing both manufacturer discounts and federal subsidies. Obama's budget proposes speeding up the process by increasing manufacturer discounts for brand name drugs from 50 to 75 percent in 2015. This proposal is estimated to save approximately $11 billion over 10 years.

Higher premiums for high income Medicare beneficiaries. High income Medicare beneficiaries already pay higher premiums for Medicare Parts B and D based on their income, and the budget proposes further increasing premiums for high income retirees beginning in 2017. The thresholds for the higher premiums will remain in place until 25 percent of Medicare beneficiaries are subject to these higher premiums. "This will help improve the financial stability of the Medicare program by reducing the federal subsidy of Medicare costs for those beneficiaries who can most afford them," according to the budget. This proposal is expected to save approximately $50 billion over 10 years.

New Medicare co-pays. The budget proposes a $25 increase in the Part B deductible in 2017, 2019, and 2021 for new beneficiaries. New Medicare beneficiaries, who do not currently make co-payments for home health services, would be changed a $100 co-payment per home health episode of five or more visits not preceded by a hospital or other inpatient care stay. The budget also proposes a Part B premium surcharge equivalent to about 15 percent of the average Medigap premium for beneficiaries who purchase Medigap policies with particularly low cost-sharing requirements. "Medigap policies sold by private insurance companies cover most, or all, of the cost-sharing Medicare requires," according to the budget. "This protection, however, gives individuals less incentive to consider the costs of health care services and thus raises Medicare costs and Part B premiums." These new Medicare costs for beneficiaries are expected to save taxpayers about $7 billion over 10 years.